Show objections against profit maximization, Financial Management

Assignment Help:

Q. Show objections against profit maximization?

1) Profit cannot be ascertained well in advance to express the. Probability of return as future is Uncertain. It is not at all possible to maximize what cannot be known. Moreover, the term profit is vague and has not been explained clearly what it means. It may be total profit before tax or after tax or profitability rate. Profitability rate, again is ambiguous as it may be in relation to capital employed, share capital, owner's funds. Or sales. This vagueness is not present in wealth maximization goal as the concept of wealth is very clear. It represents value of benefits minus the cost of investment.

2) The executive or the decision maker may not have enough confidence in the estimates of future returns so that he does not attempt further to maximize. It is argued that firm's goal cannot be to maximize profits but to attain a certain level or rate of profit holding certain share of the market or certain level of sales. Firms should try to 'satisfy' rather than to 'maximize'.

3) There must be a balance between expected return and risk. The possibility of higher expected yields are associated with greater risk to recognize such a balance and wealth maximization is brought into the analysis. In such cases, higher capitalization rate involves. Such combination of Financial Management expected returns with risk variations and related capitalization rate cannot be considered in the concept of profit maximization.

4) The goal of maximization of profits is considered to be a narrow outlook. Evidently when profit. Maximization becomes the basis of financial decisions of the concern, it ignores the interests of the community on the one hand and that of the government, workers and other concerned persons in the enterprise on the other hand.

5) The criterion of profit maximization ignores time value factor. It considers the total benefits or profits into account while considering a project whereas the length of time in earning that profit is not considered at all, whereas the wealth maximization concept fully endorses the time value factor in evaluating cash flows. Keeping the goals of financial management in view, most of the thinkers on the subject have come to the conclusion that the aim of an enterprise should be wealth maximization and not the profit maximization. Professor Soloman of Stanford University has handled the issue very logically. He argues that it is useful to make a distinction between profit and 'profitability'. Maximization of profits with a view to maximizing the wealth of shareholders is clearly an unreal motive. On the other hand, profitability maximization with a view to using resources to yield economic values higher than the joint values of inputs required is a usefl.JJ goal. Thus, the proper goal of financial management is wealth maximization.

Related Discussions:- Show objections against profit maximization

Constructing synthetic swaps, (a) Prior to FAS 133 if companies qualified ...

(a) Prior to FAS 133 if companies qualified for hedge accounting their hedges were assumed to be perfect-no valuation or testing required. Currently under FAS 133 risk managers se

What are the objectives or goals of financial management, What are the Obje...

What are the Objectives or goals of Financial Management? Objectives of Financial Management: - It is the responsibility of the top management to lay down the objectives or goa

Principle of opportunity cost, Suppose you have recently been contracted as...

Suppose you have recently been contracted as a financial consultant to a London-based engineering company, Alpha Products Plc. The company uses three components as part of their pr

The profitability and liquidity of the firm, Explain how the working capita...

Explain how the working capital management policies affect the profitability and liquidity of the firm?

Agency debentures, These debentures are backed by integrity and credi...

These debentures are backed by integrity and creditworthiness. They do not have any specific collateral backing. Therefore, the ability of the issuing GSE to gene

Putable bonds, Putable bonds can be redeemed prior to maturity at the initi...

Putable bonds can be redeemed prior to maturity at the initiative of the bondholder. These bonds are more advantageous to the investors as they get an opportunity to re

Explain the dividends and interest payments, Dividends and interest payment...

Dividends and interest payments Payment  of  dividends  and  interest  can  either  be  demonstrated under financing activities or  under operating activities. Sum of the 3

Explain about the financial risk, Explain about the Financial risk fina...

Explain about the Financial risk financial risk are presumed to be constant, changing cost of each type of capital, j, over time must be affected only by changes in the supply

Credit enhancement of asset-backed security, Credit enhancement of an...

Credit enhancement of an asset-backed security implies the existence of support for one or more of the bondholders in the structure. Credit enhancement levels var

Fixed rate versus floating rate asset backed securities, There are fi...

There are fixed as well as floating rate asset-backed securities. A floating rate asset-backed security is one whose underlying pool consists of loans or receivab

Write Your Message!

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd